Draft legislation that principally introduces joint and several liability (JSL) to supply chains involving umbrella companies has been well debated in recent weeks. The consultation window, allowing stakeholders to provide feedback on the proposals, has now closed. Mere days later, Government also released guidance on the umbrella companies tax legislation, suggesting that they are listening to stakeholders and committed to supporting the industry through these changes. Final legislation is predicted before the end of the year.
As a quick recap, the new chapter 11 within the Income Tax (Employment & Pensions) Act 2003 (“ITEPA”) (and associated Social Security Contributions and Benefits Act 1992) allow HMRC to pursue PAYE and NI liability from the umbrella company and the agency holding the contract with the end client for the supply of the worker (ie the top tier agency, or Managed Service Provider). If there is no agency in the supply chain, the liability will fall on the end client. This is a strict liability offence, meaning “no excuses!”
Here, we’ve answered some of the most common questions we’ve been asked about the reforms.
Is agency PAYE caught by the draft legislation?
This is a good question and there has been some speculation. Initially it was understood that agency workers would fall under chapter 7 ITEPA. The way in which the draft legislation defines an umbrella company, states “the worker is employed by a third person…” Although some commentators argued otherwise based on employment status case-law, agencies do not tend to strictly employ agency workers.
However, guidance released on 17th September clarified that “employed” means employed for tax purposes. In tax legislation there are only two employment statuses – employed and self-employed. There is no in-between like we have in employment law (the limb-B workers).
Therefore, we would suggest that as a general rule, agency PAYE will continue to be governed by the traditional agency legislation at chapter 7. Briefly, that says you must deem all your agency workers like employees for tax purposes and treat all remuneration as employment income (unless there is no supervision, direction or control, but that’s another matter we’ll park for now).
But, in the event there is non-compliance and/or a PAYE/NI tax liability, HMRC can use chapter 11 as a fall-back, handy since it includes JSL, meaning the agency and the client are jointly and severally liable.
What level of comfort does a contractual indemnity provide to an agency in the event there is a PAYE/NI liability?
A contractual indemnity only offers comfort to the extent that the umbrella company is financially strong and robust. There are many ways to review a company’s financial position; for example, independent credit checks are a great place to start. You can also look at the umbrella company's last set of filed accounts. Ideally, you’re looking for:
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a profitable business with a strong balance sheet,
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a positive working capital position, and
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low to no borrowing so they’re not vulnerable to interest rate changes.
Ultimately, you want to work with an umbrella company with a strong overall net asset position.
Without physically seeing PAYE/NI being paid to HMRC, how can an agency mitigate risk?
It’s critical from post April 26 that all your agency workers are being paid by trusted and reputable umbrella companies. PayStream has a six-point compliance plan to reassure our agency partners that we are compliant:
1. Ongoing FCSA accreditation;
2. A payroll audit conducted by a Big 4 accounting firm;
3. Provision of contractual indemnities;
4. Proven financial strength;
5. Monthly evidence pack;
6. Payslip checker with real time auditing by an independent third party.
How can an agency ensure real-time payments are compliant and PAYE/NI is remitted to HMRC?
It’s all well and good an umbrella company saying its compliant. Therefore, as per our six-point compliance plan, we’re asking a Big 4 accounting firm to audit our payroll. Furthermore, we have spent considerable time reviewing external payslip verification software and believe it is a valuable transparency tool for agencies seeking reassurance that PAYE/NI has been deducted and remitted correctly to HMRC.
Third-party software can provide you with monthly reports based on real-time payslip and RTI auditing, plus monthly HMRC remittance confirmation and a breakdown of all payslip audits conducted on your workers.
Could JSL potentially fall on MSPs?
Yes, we do believe that MSPs will be on the hook should any tax liability accrue in relation to a non-compliant umbrella company in the supply chain. "Umbrella company arrangements" are broadly defined in the draft legislation such as to include these types of contractual arrangements with the end client.
Will umbrella companies continue to give workers full employment rights?
Initially, there was concern that chapter 11 (JSL) could be easily bypassed simply by switching contractors away from full employment rights. However, as per the question above, the guidance makes clear that this simply won’t wash. “Employed” under chapter 11 means treating someone as employed for tax purposes. Therefore, any plan by the non-scrupulous operators to pull back on employment rights has been foiled since this arrangement still falls within chapter 11.
Do you see clients / MSPs simply banning the use of umbrella companies?
Employing and paying workers is a complicated business. We’ve spent the last 20 years developing bespoke software that can cope with the flexibility and diversity of the agency workforce. The Employment Rights Bill is also adding more complexity and litigation risk to employers, a headache that will take you away from doing what you do best. Where an end client engages with an agency that has a connected / in-house umbrella company, we perceive clients moving towards independent umbrella companies to ensure the joint and several risk falls on the umbrella company and the agency. We also perceive MSPs/clients reducing and dictating the umbrella PSL to ensure only financially robust, compliant and trusted partners are engaged in the supply chain.
What are the advantages for the worker in using an umbrella company, as opposed to being paid direct by the agency?
The advantages are the same as they have always been when working with a compliant umbrella company; including full employment rights, continuous employment across multiple assignments and access to employee reward schemes which include high street discounts. However, a crucial benefit for contractors is the ability make contributions into a personal pension plan via salary sacrifice.
When should we start preparing for April 26 and what steps should we take?
We recommend that agencies start to prepare now for April 2026, focusing their efforts on the following:
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Reviewing and mapping supply chains.
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Reviewing and continually monitoring due diligence processes and procedures.
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Consolidating your Preferred Supplier List (PSL) to closely vetted, trusted and stable umbrella partners.
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Put in place processes to ensure only PSL approved Umbrella companies pay your agency workers.
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Reviewing contractual indemnities weighed against the financial strength of your PSL partners.
Please contact your Key Account Director if you would like any further explanations or specific advice on how the proposals may affect you. Equally, if you would like to discuss how best to switch your contractors to PayStream ahead of April 26, your Key Account Director is on hand to support you.
